In mid-2014, Atlanta-based UPS Inc. and Memphis, Tenn.-based FedEx Corp. made waves by announcing that, effective in 2015, pricing for all ground parcel shipments would be based on the packages' dimensions and weight instead of their weight alone. At the time, consultants warned that the shift to so-called dimensional weight (or dim weight) pricing could result in rate increases for companies that ship lightweight, bulky packages and predicted that e-commerce shipments would be particularly hard hit. (For more on the specifics of dimensional weight pricing, see sidebar.)
The consultants were right; for many shippers, costs have increased. The good news is that there are ways to reduce the impact of this new pricing strategy. Many of these solutions are tied to packaging optimization strategies that reduce the amount of "air" that a company ships (think of a flash drive being shipped in a carton the size of a shoebox). Plus, there are places shippers can turn for advice and help.
INSIGHT FROM THE TRENCHES
One logical place to turn for help with packaging optimization would be a third-party logistics service provider (3PL). After all, 3PLs are often the folks packing the product. Mark Johnson, senior vice president of transportation and solutions for Scranton, Pa.-based 3PL Kane Is Able, says companies like Kane have come up with a multitude of best practices because they are in the trenches every day. Small and medium-sized businesses, in particular, can benefit from the 3PLs' expertise because they typically lack the resources to study the impact the pricing change will have on their costs, Johnson says.
It used to be that shipping rates for packages measuring less than three cubic feet were calculated based on the actual weight of the parcel as opposed to a combination of the package's weight and dimensions. This meant that lightweight but bulky items—like pillows or lampshades—cost less to ship than, say, bowling balls even if they took up a lot more room on a truck. That all changed in 2015, when UPS and FedEx extended the so-called "dimensional weight" (or dim weight) pricing system to smaller parcels.
As for how you go about calculating a package's dimensional weight, the formula is as follows:
1. Measure the height, length, and width of the package at the longest points in inches (include any bulges), and round to the nearest whole number.
2. Multiply the height, length, and width to get the package's cubic area.
3. Divide that number by the "dim factor" to get the dimensional weight in pounds. UPS and FedEx currently use 166 as the dim factor for domestic ground shipments. However, both companies have said they plan to shrink the dim factor to 139 at the turn of the year, meaning that more parcels will be caught in the dim weight pricing net.
The dimensional weight is then compared with the actual weight of the package. UPS and FedEx will use the larger of the two to calculate the rate.
To illustrate how the move to dim weight pricing can affect rates for low-density shipments, Justin Headley, marketing manager of the dimensioning equipment maker CubiScan, provides the example of a custom-made pillow shipped in a box that measures 18.7 by 14.3 by 6 inches (for a cubic size of 1,604 inches) and weighs four pounds, three ounces. Under traditional weight pricing structures, the shipping charge would be based on the product's actual weight, in this case five pounds (ground parcel carriers round up to the nearest pound).
Under dim weight pricing, the picture would look quite different. Dividing the carton's cubic size in inches (1,604) by 166 (the dim factor in effect in late 2016) would result in a dim weight of 9.66 pounds, which would be rounded up to 10 pounds for billing purposes. Using the revised dim factor of 139 would result in a dim weight of 11.53 pounds, which would be rounded up to 12 pounds.
In either case, the dim weight far exceeds the actual weight (five pounds). Because the carriers use the larger of the weight figures to calculate the rate, the shipping cost will be at least twice as much as the shipper was accustomed to paying before the advent of dim weight pricing.
"We are always looking at ways to streamline packaging and reduce the amount of air that's shipped, and we play that back up to our customers," he says. "If we find that handling someone's materials in the way they want them handled adds cost, that's something that we would [communicate back to the client]. From the stackability of the product to the dunnage in a shipment, we are constantly looking at ways to take out costs."
Chattanooga, Tenn.-based Kenco Logistics Services, another 3PL, also employs packaging engineers that work with clients to find the best packaging configuration for their products, according to Turney Thompson, vice president of Kenco Transportation Management, one of Kenco's units.
It's worth noting that it's not just parcel shippers that are feeling the effects of the dim weight revolution. Less-than-truckload shippers are affected as well. That's because a number of less-than-truckload (LTL) carriers now offer customers a choice when it comes to the method used to determine their freight charges: dimensional weight pricing or traditional "truck rate class" pricing—that is, pricing based on how a product is classified under a formula established decades ago by the National Motor Freight Traffic Association (NMFTA), an industry group.
3PLs can help companies that use LTL services analyze their options and decide what's right for them. For example, Kenco recommends that its clients opt for dimensional weight pricing if they have a homogenous product with uniform shipping characteristics, according to Thompson. He says Kenco has customers in the carpet industry that have benefited from choosing dim weight pricing. It's a different story for customers that ship a mix of different-sized and -shaped products on a pallet, however. These shippers might find dim weight pricing difficult to manage, Thompson explains.
THE BASTARD CHILDSome industry experts believe 3PLs could be doing more for their customers. According to Jack Ampuja, president of the consulting company Supply Chain Optimizers, many 3PLs are focused on warehouse operations, which they see as their core area of expertise, and do not address packaging optimization. "They just don't see it as their responsibility," says Ampuja.
But Ampuja doesn't lay the blame solely at the feet of the 3PLs, saying most companies view packaging as "a bastard child" and therefore, pay it little or no attention. Plus, in many organizations, marketing or engineering "owns" the packaging process, meaning logistics and supply chain managers have little say in packaging decisions, he adds.
Johnson of Kane Is Able agrees that many companies don't give packaging the attention it deserves. Although packaging optimization is a service that Kane Is Able offers, he says he doesn't get the sense that it's a "front and center issue" for most of the 3PL's customers.
Furthermore, shippers sometimes unwittingly behave in ways that inhibit a 3PL from giving its all to the effort. That can happen, for instance, when the shipper fails to provide some incentive for the 3PL to help it optimize its packaging. Many shippers pick their provider solely on price but then expect it to absorb all the costs for implementing innovative solutions, says Ampuja. The 3PL, however, will have little incentive to invest in new technology, add more box sizes, or re-engineer packing stations in a bid to drive down shipping costs if it won't see any of the benefits or share in the savings.
"Who's going to make that tradeoff?" asks Ampuja. "The 3PL is charged with driving the warehousing costs down. It may [not] even control the freight costs. Those [savings] go directly to the client." Under the circumstances, it's not hard to understand why a 3PL would be reluctant to make that investment.
LET'S WORK TOGETHERTo avoid these kinds of miscommunications and misunderstandings, experts advise shippers and providers to take a collaborative approach to cutting shipping costs. The first step, according to Ampuja, is just sitting down with your 3PL provider and having a discussion about packaging and dim weight concerns. (If the 3PL lacks expertise in packaging optimization, Ampuja suggests calling in another outside expert, such as a packaging engineer, supplier, or consultant, to participate in these conversations.)
One avenue that's likely to come up in the discussions is the deployment of technology—specifically, dimensioning equipment. Also known as cubing and weighing equipment, dimensioning devices use sensors to calculate the exact dimensions of a product or package. As for how that affects shipping costs, determining a product's precise dimensions reduces the likelihood that order packers will choose a too-large box, explains Justin Headley, marketing manager for CubiScan, a company that makes dimensioning equipment. If left to rely on their own estimates, order packers will select a bigger box than necessary 25 percent of the time, according to data from Supply Chain Optimizers. As a result, they end up using more packaging than they need, creating enormous waste and unnecessary shipping expense.
If the price of the equipment is an obstacle, cost-sharing may offer a solution. For example, Ampuja is currently working on a project that involves the installation of two dimensioning systems, with the customer paying for one system and the 3PL paying for the other.
Another path to optimizing packaging—and thereby, cutting shipping costs—is to involve 3PLs early on in the product development process, say both Thompson and Johnson. "Once you get the product made, packaged, and palletized for shipment, it's a fixed game," says Johnson. At that point, there's little you can do to reduce shipping costs.
If you bring your 3PL into the discussions at an earlier stage, however, it will have a chance to offer suggestions before the packaging is designed. It might even be able to suggest design changes to the product itself that will make it easier to ship.
Long story short, there are ways in which 3PLs can help shippers reduce the costs associated with dim weight pricing. But as is so often the case, it will require the shipper to view its 3PL as a partner and to treat it accordingly.
